This Month’s Selloff, in Two Charts

Stocks are flip-flopping between small gains and losses Monday, as the Dow and S&P 500 each try to avoid their first four-day losing skid of the year.

The major averages are riding a two-week losing streak after hitting record highs earlier this month. The Dow is down 3.7% in that time frame, while the S&P 500 is off 3.2%. Deciphering whether the latest downdraft is a blip or the early stages of a bigger pullback is one of the main questions facing investors during the final two weeks of August, which are historically some of the slowest times on Wall Street.

“We’ve started to see some early signals that the market is getting closer to an oversold condition,” says Chris Verrone, head of technical analysis at Strategas Research Partners in New York.

As the chart below shows, the percentage of S&P 500 stocks trading above their 20-day moving average hit the lowest level since late-June, around the time the market bottomed before the July rally, Mr. Verrone’s research shows.

Strategas Research Partners

In addition, the percentage of stocks trading at a 20-day low jumped above 40% last week. “Readings north of 50% tend to be buyable in the context of an uptrend,” he says.

The Dow recently fell 14 points, led lower by J.P. Morgan and Hewlett-Packard. The S&P 500 fell 1 point to 1654. The last time both indexes suffered at least a four-day losing streak was December, when fears about the fiscal cliff dominated the headlines.

While the technicals suggest stocks may offer a buying opportunity at current levels, some historical context suggests investors may want to the think twice before buying. As this second chart shows, August and September are typically two of the worst-performing months of the year for stocks.

Strategas

“Granted, seasonality is still a headwind for much of the next six weeks, so stock selection likely remains an important theme as the S&P attempts to stabilize in the 1630-1640 support range,” Mr. Verrone says.

For now, some investors suggest sitting on the sidelines may be the best course of action.

“Our leading indicators are, unfortunately, firmly in the unfavorable camp,” says David James, director of research at James Investment Research. “This often suggests risk levels are elevated. Recently there have been too many speculative buyers and the more cautious path remains a prudent strategy.”